Two Words Illustrate Why This Small Cap Stock Could Soar

The labor market is changing, and this environment favors an investment in Korn/Ferry (NYSE: KFY) much more than traditional staffing firms such as Manpower (NYSE: MAN) or TrueBlue, (NYSE: TBI) .

Whether you choose to believe that statement, and the facts I'm about to share with you, is completely up to you. All I ask, is that by the end of this article, you know the difference between Korn/Ferry and staffing companies. You see, in my estimation, Korn/Ferry is often misrepresented as a staffing company.

In two simple words I will use to illustrate why Korn/Ferry is different than the staffing "herd,' and why it has such a wide competitive moat -- Jed Hughes.

Image courtesy of Korn/Ferry

A small glimpse into what makes Korn/Ferry specialLast Thursday, on my drive home, I decided to tune into the local sports radio station. I'm a die-hard Chicago Bears fan, and with the NFL scouting combine in full-gear, I wanted a scoop on this year's draft. Instead, the afternoon show's host was speaking with a man named Jed Hughes about hot NFL General Manager candidates, and suddenly my mind drifted in a Foolish direction.

That Coach, of course, was Pete Carroll, and the rest is Super Bowl history.

Hughes was calling in from the combine; he attends everywhere for the networking opportunities. You see, Hughes has made so many connections over the years, that he's viewed as an expert in the industry. An NFL team knows that his level of "stickiness" in the industry is likely to lead them toward a top hire.

You may want to invest in TrueBlue or Manpower still, but you'd have to admit that they do not operate on this talent playing field, so to compare Korn/Ferry to staffing providers is silly. With a little research, you'd see that Korn/Ferry has experts like Hughes in every niche and specialty market, from Government lobbyists to CEO's of advertising firms, and they truly have very few real competitors of scale.

While nothing is certain in investing, you're off to a pretty good start when you find a brand that is indispensable to its market that few investors actually understand.

Why Korn/Ferry makes sense nowKorn/Ferry, TrueBlue, and Manpower all trade at about twenty times last years earnings. Yet I prefer Korn/Ferry for tomorrow's market, and feel the market is discounting shares.

Temporary labor providers have the advantage during periods of high, yet stable, unemployment. We're coming out of an environment like that. In recent years, businesses were uncertain about the economy, so they turned to the lower risk proposition of temporary labor. In addition, while companies slashed middle management positions in recent years, they held on to core temporary skilled labor positions, such as Machinists.

That was the story yesterday; is tomorrow looking better? I think so. In addition to lower unemployment rates, and better GDP numbers, the U.S. is hiring executive level talent again. In Manpower's most recent workforce shortage survey, which highlights the most in-demand occupations, executive and management positions cracked the top five for the first time in five years.

That feeds right into Korn/Ferry's wheelhouse. They find that "needle in the haystack" candidate in niche industries, such as Pete Carroll, and they charge a hefty fee (minimum of 20k for "normal industries") for each placement.

In its most recent quarter, Korn/Ferry reported record fee revenue, which increased 21% year over year. This is significant because Korn/Ferry's recruitment process outsourcing (RPO) and consulting business have done well in all environments.

The fee revenue jump (for direct hire recruitment) would lead us to put some weight in the aforementioned labor survey and give us reason to believe Korn/Ferry has a relatively unknown growth catalyst.

Foolish conclusion: a stock for a better tomorrowI have nothing against temporary staffing stocks. I've recommended both Kelly Services and Robert Half, both excellent franchises, and I believe they will continue to outperform.

When the market is favorable; however, I believe Korn/Ferry's business model is better. Korn/Ferry's only expense is its buildings and the salary of its consultants; it isn't worried about workers compensation claims, or anything else that goes with managing temporary employees.

Ultimately you have to believe that the pinch for truly elite talent will get tighter to buy into Korn/Ferry's future. If you agree with me, you may use the fact that the stock is lumped in with "temp staffing firms," to buy shares today. I believe this common misunderstanding provides a great opportunity to pick up shares at a discount.

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